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Ericsson Plots China Invasion as Viking Raids Bring Booty

Iain Morris
10/18/2019

When the Vikings went in search of foreign booty, they needed ships that were fast, lightweight and as tough as the warriors inside. Overburdened, slow and under attack by aggressive Chinese challengers, Ericsson's vessel sprang leaks in 2016, prompting a rescue mission by the Swedish vendor's main shareholders. Patched up and modified under Börje Ekholm, the latest chieftain, it is sailing into rival territory with warlike intentions.

The modern-day Viking aggression started in 2017, months after Ekholm took the helm, when it began talking seriously about "strategic contracts." In the 4G era, Ericsson had ceded market share to Huawei, a Chinese aggressor that has built a reputation for low-price but top-notch gear. These strategic contracts were the Ericsson counterattack -- raids on rival holdouts where Ericsson saw an opportunity to grow market share.

What, No Pointy Horns?
Ericsson CEO Borje Ekholm has swapped a helmet and longsword for a microphone and written notes as he plots the latest Viking invasion.
Ericsson CEO Börje Ekholm has swapped a helmet and longsword for a microphone and written notes as he plots the latest Viking invasion.

That opportunity arose partly because Ericsson had managed to restore some of its own reputation for technological brilliance in the short Ekholm era. Selling non-core assets and boosting research-and-development (R&D) spending allowed it to concentrate on mobile infrastructure, and particularly 5G -- a hyped and emerging network technology. Its product upgrades were well timed, coinciding with a new cycle of spending by some operators. In late 2017, it replaced Nokia in Deutsche Telekom's German mobile network at least partly because its technology was deemed superior.

Favorable contract arrangements also lured customers. Last year, when it landed another deal to replace Huawei in some parts of Telefónica's Argentinean network, it offered lower prices than its competitors, Light Reading has learned. In recent months, it bid competitively to secure another deal at Huawei's expense with Telia Norway. Ericsson's commitment to support a nationwide 5G rollout by 2023 -- a more aggressive timetable than most other European telcos are considering -- helped to snag the contract.

The land grab has brought success. Besides the deals already mentioned, Ericsson is also replacing Nokia in Vodafone's UK mobile network and Huawei in TDC's Danish one. Still the world's biggest supplier, Huawei is in defensive mode while US authorities urge Western allies to ban it as a potential threat to national security. Nokia, the other member of the "big three," has provided no firm evidence of recent "swaps" where it has come out on top.

Fredrik Jejdling, the head of Ericsson's networks business, claims Ericsson's share of the mobile infrastructure market is now growing about 1% annually. The boast is credible, according to one respected analyst. "We estimate Ericsson's RAN [radio access networks] share is up about 1.2% between 2016 and 2018," said Stefan Pongratz of Dell'Oro Group, in comments emailed to Light Reading. "There are regional variations as well. Our estimates suggest Ericsson's RAN revenue share gains in the North America region have been more pronounced, with a nearly six percentage point gain for Ericsson when comparing the first half of 2019 and 2016."

Ericsson's Share of RAN Market
Source: Dell'Oro.
Source: Dell'Oro.

A 1% annual increase may sound small, but sustained growth at that rate could swiftly tilt the balance in Ericsson's favor as 5G takes off. Earlier this year, Vodafone CEO Nick Read put Ericsson's share of the mobile infrastructure market at 27%, with Huawei on 28% and Nokia holding 23%. Ericsson this week raised its sales guidance for 2020 to between 230 and 240 billion Swedish kronor ($23.8 to $24.8 billion), having originally forecast SEK210 to 220 billion ($21.7 to $22.8 billion), due partly to brighter 5G prospects than it previously envisaged. On a reported basis, network sales were up 14% for the first nine months of 2019, to SEK110.6 billion ($11.4 billion), compared with the year-earlier period.

Choppy waters
But there are choppy waters ahead. The first squall is the margin pressure that accompanies the strategic contracts. In deals where Ericsson is replacing a rival, it is forced to swap out that company's 4G equipment at some cost to prevent interoperability problems. Even some projects where Ericsson is updating its own 4G sites to support 5G services have squeezed margins, says Jejdling. For a company under pressure to improve profitability, that is a concern.

Despite the short-term headwinds, Ekholm insists the strategy will produce a stronger business in the long run. "It is important to find a deployment with global scale that helps with our own investment and depreciation over a larger footprint," says Jejdling. "We will not take deals that do not add value over time."

So far, the company has managed to offset any margin pressure. Strategic contracts sapped its gross margin by 0.8 percentage points in the recent third quarter, and yet the gross margin at its networks business inched up 0.2 percentage points, to 41.6%, thanks largely to a favorable licensing settlement. Despite the impact of a $1 billion US fine for corruption under previous management, Ekholm remains confident of hitting a 10% operating margin target next year. By 2022, it expects an operating margin of between 12% and 14%, having previously aimed for more than 12%.

A much bigger issue is China. Having grown its market share closer to home, Ericsson is drawing up plans for a Chinese invasion. The goal, says Jejdling, would be to boost market share in that market from the current level of about 10% -- a figure that clearly disappoints Ekholm. "We want to be stronger in China in 5G than we were in 4G," he told analysts during a call this week about the latest financial results.

Ekholm's desire to play a bigger role in China is not hard to fathom. According to his estimates, the country today accounts for about 60% of the global 4G infrastructure market. That share is unlikely to be less in the 5G era, he says. Even before the award of contracts and launch of mass-market 5G services, operators have already installed many thousands of 5G basestations. As it participates in those trials, Ericsson is ramping up local investments in R&D and supply chain facilities. "There are trial costs and unique developments where we need software engineers focused on those tracks for Chinese operators," Jejdling tells Light Reading when quizzed about the nature of the investment activity. "Part of it is unique for the demands in China."


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But China's own vendors have always dominated mobile contracts in the Chinese market, and the timing of Ericsson's campaign does not look auspicious. Market watchers have long warned that US efforts to upset Huawei and ZTE, a smaller but significant Chinese network technology supplier, could provoke a backlash in China against Western vendors. Then, in July, Kristian Pullola, the chief financial officer of Nokia, warned of growing support for local vendors, in preference to Western rivals, in the Chinese market. "That is something we need to recognize when we … look at where to invest and when to back away from some of the competitive situations that hinder us to deliver profitable and longer-term growth," he told Light Reading at the time.

Developments in the Chinese market could also weaken the outlook for equipment vendors. In September, China Telecom and China Unicom, two of the country's three big mobile operators, announced plans to build a shared 5G network, using not only the same sites but also the same basestation equipment. A widespread assumption is that such an arrangement will mean there is less work available for suppliers.

Jejdling disagrees. "Sometimes one strong player is better than two weak ones," he says. "You still have to dimension for peak rates, so in terms of capacity and coverage it is likely to be similar." He is confident the network-sharing deal between Telecom and Unicom will not significantly reduce the size of the addressable market for 5G equipment.

Nevertheless, he acknowledges there are "geopolitical dimensions" that could influence the decisions taken by China's state-backed telcos. And Ekholm was unable to provide any certainty during his call with analysts this week. "No awards have been made and we have no way of knowing potential market shares or price levels," he said.

If Ericsson really can challenge Huawei on price and technology, it will be hard for Chinese operators to snub it on purely commercial grounds. But the levels of geopolitical interference with the telecom supply chain are now unprecedented, threatening a fragmentation of the entire ecosystem into Chinese and Western fiefdoms. Ericsson's ability to establish outposts in China would be welcome to those worried about the survival of a global standard and make a huge difference to the company's sales prospects. With contract decisions expected in the coming weeks, the newly aggressive Swedes will not have to wait long to find out.

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— Iain Morris, International Editor, Light Reading

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